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August 18, 2008

US SEC committee reveals plan to simplify reports

Key performance indicators and eXtensible Business Reporting Language (XBRL) are two tools Edward Nusbaum believes could significantly help investors better understand complicated financial reports.

The Grant Thornton US chief executive was one of 17 members on the US Security and Exchange Commission’s (SEC) advisory committee on improvements to financial reporting, which issued its final recommendations recently.

The committee was established in June last year to examine the US financial reporting system and suggest ways to increase the usefulness of financial information while reducing the complexity of the system. Its members included users of financial statements, former regulators, chief financial officers and Deloitte Global chief executive James Quigley.

The 25 final recommendations had five underlying themes: increase the usefulness of information in SEC reports; enhance the accounting standards-setting process; improve the substantive design of new accounting standards; delineate authoritative interpretive guidance; and clarify guidance on financial restatements and accounting judgments.

Nusbaum said no single recommendation or even the cumulative effect of 25 recommendations will completely eliminate complexity.

“Part of the problem of course is that the world is complex. There are a lot of very complicated business transactions that take place and when you have complicated derivatives or financial instruments, the accounting is going to be complicated and there is nothing we can do about that,” he explained.

“Having said that, when you add up all of these recommendations, they do make a difference and they do have the cumulative effect of reducing complexity – making the financial statements easier for investors to understand and, over the long run, improving the quality of the financial information.

“For example adding key performance indicators (KPIs) doesn’t simplify a company’s life, but it does provide useful information on a consistent basis to investors. It should make it easier for investors to analyse the performance of a company and not just financial performance, but the overall development of a company. In essence, that reduces the complexity of the ability to analyse the financial results.”

The theme of increasing the usefulness of information in SEC reports included the recommendation for KPIs, which could take the form of a short executive summary at the beginning of a company’s annual report, to describe the most important themes and indicate where investors could find more detailed information on particular subjects.

The mandatory use of XBRL was also promoted as a way of simplifying the delivery of financial information. Nusbaum said KPIs and XBRL are two recommendations that Grant Thornton will be particularly active in implementing.

The mid-tier leader said providing guidance on accounting judgements and getting investors more involved in the standard-setting process are also important.

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